’ adaptation to the loss situation and, subsequently, whether this adaptation affects future investment decisions. As investors … performance, together influence the decision to hold on to or to capitulate on an investment. We study the relative contribution … decision to capitulate an investment, however, only depends directly on the expectation about the stock’s future performance …

fluctuations. When all firms pay for luck, we show that an effort-inducing mechanism exists: managers have additional incentives to … exert effort in utilizing investment opportunities, which helps them keep up with their peers during industry movements. In … can nonetheless exacerbate aggregate fluctuations in the real economy by incentivizing excessive systemic risk …